4.2 Disposition of ground one
16 In my view, the Commissioner should not be left to bear any part of his costs in applying successfully to set aside the Full Court's judgment on the ground that it was procured by fraud for the following reasons.
17 First, as a matter of legal principle, it is correct to say that indemnity costs can ordinarily be awarded only on the basis of a party having engaged in "delinquency in the conduct of the proceedings": Harrison v Schipp [2001] NSWCA 13 at [136] (emphasis added) (Giles JA, Handley JA agreeing at [1]). Similarly, in Henderson v Amadio Pty Ltd [1996] FCA 184 at [42], Heerey J held that:
the improper conduct of an unsuccessful party which will lead to an award of indemnity costs is usually related to the way the litigation is conducted, rather than the inherent badness of the conduct which gave rise to the litigation. This is not universally true; for example contempt of court usually attracts costs on an indemnity basis. Nevertheless, it seems to be rare that findings of serious misconduct such as fraud of itself gives rise to an order for costs on an indemnity basis.
(Emphasis added.)
18 This ordinary rule applies equally in the context of actions in fraud where, in general, a party who has perpetrated a fraud on another party will not, by reason of that antecedent conduct alone, be rendered liable for indemnity costs. Hence, for example, in NMFM Property Pty Ltd v Citibank Ltd (No 2) [2001] FCA 480; (2001) 109 FCR 77 at [56], Lindgren J held that:
The ordinary rule is that an award of costs is on the party and party basis, and that it is only in a special case that the discretion to depart from that rule will be properly exercised … there is no counterpart ordinary rule that in the absence of special circumstances indemnity costs will be ordered where the losing party was guilty of ethical or moral delinquency in the antecedent facts which have given rise to the litigation. Even in a proved case of fraud, for example, in my opinion the presumption is that a costs order against the fraudulent party will be on the party and party basis. The conduct of a party that is relevant to the issue of indemnity costs is the party's conduct as litigant. But, as noted below, the knowledge that a party has, including knowledge of his or her past conduct, may be relevant to an assessment of his or her conduct as litigant.
(Citations omitted, emphasis added.)
19 This approach to the award of indemnity costs is well-established in Australian law: see, for example, Hypec Electronics Pty Limited (in liq) v Mead; BL & GY International v Hypec Electronics Pty Limited (in liq) [2004] NSWSC 731; (2004) 61 NSWLR 169 at [46] Campbell J (overturned on appeal, although on a different issue).
20 Two further comments should be made. First, these authorities did not consider whether the ordinary rule applied in circumstances where the antecedent fraudulent conduct giving rise to the proceeding was perpetrated on the Court itself. Nor, when asked by the Court, were the parties able to identify any Australian or other authority directly on this point.
21 Secondly, the principle that indemnity costs are awarded only on the basis of delinquency in the subject proceedings is not described as an absolute rule; rather, it reflects the ordinary costs position. Hence, it will be recalled that Lindgren J in NMFM described the principle that costs are awarded against the fraudulent party on a party/party basis as a "presumption": at [56]. Justice Heerey in Henderson similarly observed that, whilst the "inherent badness" of the conduct giving rise to litigation will not "usually" justify an award of indemnity costs, "this is not universally true": at [42]. It cannot therefore be said that there is a strict rule that antecedent delinquent conduct can never give rise to indemnity costs.
22 Secondly, one well-established and critical exception to the principle that indemnity costs are awarded only on the basis of conduct in the subject proceedings is in the context of proceedings for contempt of court: Henderson at [42]. Indeed, in Australia, it has been held that orders requiring a contemnor to pay their costs on an indemnity basis, while discretionary, are "not uncommon", are the "common or usual practice", or is the "usual order": Infa-Secure Pty Ltd v Crocker (No 2) (2016) 338 ALR 586; [2016] FCA 202 at [44] (Reeves J); Kazal v Thunder Studios Inc (California) [2017] FCA 238 at [90] (Katzmann J), cited with approval by Kazal v Thunder Studios Inc (2017) 256 FCR 90; [2017] FCAFC 111 at [192] (the Court); Deputy Commissioner of Taxation v Gashi (No 3) [2011] VSC 448 at [20] (Dixon J).
23 The rationale for this approach was explained by Megarry VC in EMI Records Ltd v Ian Wallace Ltd [1982] 2 All ER 980; [1983] 1 Ch 59. That case concerned applications for review of taxations of costs on two orders for costs, awarded on an indemnity basis, made on successive motions for contempt in the same case. Megarry VC relevantly upheld the power of the Court to make an order for indemnity costs and said (at 76, in the context of pointing to the need for the rules to properly define inter partes orders for costs on an indemnity basis):
In particular, it [a proper definition in the rules] is needed in cases of contempt. In such cases, nothing should be done to deter a person from bringing a contempt to the notice of the court; and the risk of having to bear any of the costs will often be a real deterrent: see Morgan v. Carmarthen Corporation [1957] Ch. 455, particularly at 474 … for [indemnity] orders in cases of contempt are being made all the time, and they ought not be left in any state of doubt.
(Emphasis added.)
24 Thus, it is the public interest in ensuring that contempts of court are prosecuted which explains the common or ordinary practice of awarding indemnity costs in such cases. For example, the Full Court in Ali v Collection Point Pty Ltd [2011] FCAFC 87 at [80], stated as follows:
As the authorities reveal, indemnity costs are not infrequently awarded where an applicant successfully prosecutes a charge of contempt. In that context, it may be relevant that, as Tracey J stated in Bovis Lend Lease Pty Ltd v Construction Forestry Mining and Energy Union (No 2) [2009] FCA 650 at [45], "the applicant has not been seeking any remedy on its own behalf but rather has been upholding the various public interests which are served by prosecutions for contempt of court".
(Emphasis added.)
25 Similarly, in Universal City Studios LLLP v Hoey t/as DVD Kingdom (2007) 73 IPR 45; [2007] FCA 806, Buchannan J held at [102] that:
an order for the payment of indemnity costs, where it is made, recognises both the public interest in ensuring that orders of the Court are complied with and the equity in ensuring, as far as possible, that the applicant required to take the further step of contempt proceedings should be protected by an appropriate costs order.
26 Two further examples suffice to reinforce the point. First, Reeves J in Infa-Secure at [44] explained that "[t]he reason for this approach is that the applicant is performing both a private and a public service in prosecuting charges of contempt": (emphasis added). Similarly, in Gashi at [20], Dixon J explained that the rationale for ordering indemnity costs in cases of contempt is that "one reason the plaintiff is bringing proceedings is to vindicate the public interest in upholding the rule of law" (emphasis added). As these further examples make clear, indemnity costs may still be considered appropriate in proceedings for contempt of court, even where other reasons or interests, in addition to the public interest, are furthered in pursuing those proceedings.
27 The application of those principles has been held to justify the award of indemnity costs in many cases, including where the moving party is a government party: see, eg, Gashi (No 3) at [20]-[21] (where the moving party was the Deputy Commissioner of Taxation); R v Witt [2016] VSC 169 at [23] (J Forrest J); see generally GE Dal Pont, Law of Costs (LexisNexis Butterworths, 4th edition, 2018) at 16.72.
28 Thirdly, in my view, the rationale for holding that an award of indemnity costs may be made in contempt cases applies equally in circumstances in which a party has successfully brought proceedings to set aside a judgment obtained through fraud. Adapting the language and reasoning of Buchannan J in Universal City Studios, an order for indemnity costs made in such circumstances recognises the public interest in ensuring that judgments of the Court are not obtained through fraud. Further, the award of indemnity costs in such cases promotes equity in ensuring that the applicant who has been required to take the further step of instituting fresh proceedings to set aside the fraudulently obtained judgment is not deterred from so doing by the prospect that she or he may ultimately be "out of pocket".
29 In this respect, there can be no doubt that setting aside fraudulently obtained judgments serves a paramount public interest. In Australia and Canada, the Court's power to set aside a judgment obtained by fraud has been described as occupying a "special place": Takhar at [48] (Lord Kerr, with whom Lord Hodge, Lord Lloyd-Jones and Lord Kitchin agreed). As Lord Buckmaster said in Hip Foong Hong v H Neotia & Co [1918] AC 888 at 894 in a passage approved, for example, by Menzies J in McDonald v McDonald [1965] HCA 45; (1965) 113 CLR 529 at 541, "[a] judgment that is tainted and affected by fraudulent conduct is tainted throughout, and the whole must fail" (emphasis added).
30 That special place reflects the fact that a judgment obtained by fraud undermines the integrity of the judicial process and the rule of law. As Lord Kerr also said in Takhar at [52]-[53] in holding that there is no requirement that an action to set aside a judgment on the ground of fraud be based on new evidence which could not reasonably have been discovered in the earlier proceedings:
The idea that a fraudulent individual should profit from passivity or lack of reasonable diligence on the part of his or her opponent seems antithetical to any notion of justice. Quite apart from this, the defrauder, in obtaining a judgment, has perpetrated a deception not only on their opponent and the court but on the rule of law.
Newey J [in Takhar at first instance [2015] EWHC 1276 (Ch)] put it well when he said, at para 37 of his judgment:
Supposing that a party to a case in which judgment had been given against him could show that his opponent had obtained the judgment entirely on the strength of, say, concocted documentation and perjured evidence, it would strike me as wrong if he could not challenge the judgment even if the fraud could reasonably have been discovered. Were it impossible to impugn the judgment, the winner could presumably have been sent to prison for his fraudulent conduct and yet able to enforce the judgment he had procured by means of it: the judgment could still, in effect, be used to further the fraud.
I agree with all of that. It appears to me that the policy arguments for permitting a litigant to apply to have judgment set aside where it can be shown that it has been obtained by fraud are overwhelming.
(Emphasis added.)
31 Similarly, in Canada v Granitile Inc [2008] OJ No 4934; (2008) 302 DLR (4th) 40 at [303], Lederer J of the Ontario Superior Court of Justice held that "[w]here fraud is present, finality will give way to the responsibility of the court to protect its process 'so as to ensure that litigants do not profit from their improper conduct'" (quoted with approval by Lord Kerr in Takhar at [51]).
32 As the example given by Newey J in Takhar aptly illustrates, to permit judgments obtained by fraud to stand would also undermine public confidence in the judiciary.
33 Litigation to set aside a judgment obtained by fraud thus serves a vital public interest. As with contempt of court cases, nothing should be done to deter a person from bringing that fraudulently obtained judgment to the attention of the Court. An indemnity costs order, in those circumstances, recognises the "special or unusual feature in the case to justify the Court in departing from the ordinary practice": Colgate-Palmolive at 233 (Sheppard J).
34 Given, therefore, the seriousness of the fraud perpetrated upon the Commissioner and Full Court in Rawson (FCAFC), and the public interest in setting aside the Full Court judgment on the grounds it was obtained by fraud both generally and by reason of the fraud it perpetrated upon the public revenue, in my view Rawson should be required in the exercise of discretion to pay indemnity costs for the entirety of this proceeding save for the costs of this application.
35 To that conclusion, the following comments should be added.
36 First, in support of its submission, the Commissioner referred to two decisions: Australian Federation of Consumer Organisations Inc v Tobacco Institute of Australia Ltd [1991] FCA 150 and Royal Bank of Scotland plc v Highland Financial Partners LP (Costs) [2013] EWCA Civ 472 (read with Royal Bank of Scotland plc v Highland Financial Partners LP [2013] EWCA 328). With respect, however, I do not consider that those decisions ultimately assisted the Commissioner.
37 As for Tobacco Institute, I consider that case to be distinguishable from the present proceeding. Tobacco Institute was a successful "test case" concerning the respondent's misleading and deceptive representations as to whether "passive smoking is a hazard to the health of non-smokers": at [18] (Morling J). Justice Morling awarded indemnity costs, amongst other things, because of the "public interest" in prosecuting that case. However, as Rawson submits, the order in Tobacco Institute was made in circumstances where not only had a private individual sought relief in the public interest, but the Court held that the respondent's conduct in the litigation had caused considerable expense in vindicating the public interest in the subject matter of the proceeding.
38 The relevance of the Highland Financial cases involves more complex issues. Those cases are lengthy, and it is not necessary to repeat the detail of the judgments here. In essence, the primary judge (Burton J) granted judgment in favour of the Royal Bank of Scotland (the liability judgment): Highland Financial at [2]. Following subsequent related litigation, the respondents cross-appealed the liability judgment on the ground (amongst others) that it had been procured by fraud. In essence, the respondent alleged that the Royal Bank of Scotland had fraudulently suppressed certain critical facts during the liability trial.
39 The Court of Appeal accepted that the fraud had been established. The essential conclusion in that case, as articulated in Highland Financial by Lord Justice Aikens at [179] (with whose reasons Lord Justice Toulson at [181] and Lord Justice Maurice Kay at [182] agreed), was as follows:
[T]he Liability judgment was obtained by the fraud of [the Royal Bank of Scotland] through the deliberate and dishonest misstatement and concealment of facts by [a witness]. I would therefore allow the cross-appeal of Highland from Burton J's May 2012 judgment on that issue. The Liability judgment, the Court of Appeal's judgment on Liability and the Quantum judgment must therefore all be set aside.
40 The respondents then sought, and the Court of Appeal awarded, indemnity costs. The reasons for considering that orders to that effect were appropriate were expressed in the following terms by Lord Justice Aitkins Highland Financial (Costs) at [14]:
Given the judge's findings against RBS on the misconduct of SG, not only in 2008/9 but also in the Quantum and 2012 trials, we have no hesitation in saying that the conduct of RBS (through SG) takes this case out of the norm. This court should mark its disapproval of the conduct of SG, for which we have decided that RBS must be held responsible, by ordering that all Highland's costs be paid on an indemnity basis.
41 While not necessary to decide the point, the decision in Highland Financial (Costs) ultimately lends little assistance to the Commissioner's case for indemnity costs to be awarded on the basis of public interest considerations. In Highland Finance (Costs), the Court was concerned with an appeal on the ground that the primary liability judgment had been obtained by fraud. Thus, the deliberate concealment of facts by the Royal Bank of Scotland through its witness which justified the grant of indemnity costs was conduct in the same proceeding, that is, it was "conduct in the litigation of the party against which … an order [for indemnity costs] is made": Highland Financial (Costs) at [10] (Lord Justice Aitkins) (emphasis added). By contrast, as I have explained, the Rawson Primary Judgment was a separate proceeding based upon a separate and distinct action alleging fraud in the conduct of a different proceeding.
42 In any event, the statement that a Court should "mark its disapproval of the conduct" of the defrauding party is not directly apposite to Australian law where, as earlier explained, the focus of an indemnity costs order is on "indemnify[ing] a successful party in litigation, not … punishment": Oshlack at [1] (Brennan CJ).
43 Secondly, in submissions, Rawson relied on Clone Pty Ltd v Players Pty Ltd (in Liquidation) (2016) 127 SASR; [2016] SASFC 134 (Clone SASFC). Again, I consider that case to be distinguishable from the present proceedings.
44 Clone SASFC also involved litigation of considerable complexity, and it is again not necessary to repeat the detail of that decision. A helpful summary is provided by the High Court in Clone Pty Ltd v Players Pty Ltd (In Liquidation) (Receivers & Managers Appointed) (2018) 264 CLR 164; [2018] HCA 12 (Clone HCA) at [4]-[40].
45 In essence, in Clone, the parties entered into a lease with respect to certain properties: Clone HCA at [4]. A dispute subsequently arose with respect to those premises: ibid at [11]-[12]. Clone, at trial, successfully brought proceedings against the first respondent with respect to those premises: ibid at [24]-[25].
46 After the conclusion of the trial and a Full Court appeal, certain copies of the agreement to lease were discovered: ibid at [30]-[31] (described as the "third lease agreement"). A fresh application to set aside the judgment was made by Players Pty Ltd: ibid at [32]. Players alleged that the judgment could be set aside on the basis of Clone's malpractice, including because Clone had breached certain obligations to discover the third lease agreement: ibid at [33].
47 The primary judge agreed, accepting Player's case for setting aside the judgment on the basis of Clone's malpractice. The primary judge upheld the allegation of a failure to disclose on the basis that the third lease agreement was within Clone's power, and the failure by Clone to disclose it constituted serious malpractice, albeit not intentionally so: Clone HCA at [34]; Clone SASFC at [186]. On appeal, the Full Court by majority accepted that the failure to disclose the relevant lease document constituted serious malpractice, and also accepted the allegation of misconduct by Clone misleading the trial judge. The majority further held that the misconduct was sufficient to enliven the discretionary power of the Court to set aside the earlier judgment at trial: Clone HCA at [34]-[35].
48 Relevantly for present purposes, the trial judge in Clone ordered that Clone pay the costs of the application to set aside the earlier judgment on an indemnity basis. The Full Court of the Supreme Court of South Australia set aside that order, and ordered instead that Clone pay costs on a party/party basis. In so holding and in a passage relied upon by Rawson, Blue J held at [407] (Stanley J agreeing at [420]):
Given the nature of a set aside application, ordinarily the conduct of the opponent amounting to malpractice should be regarded as relevantly falling on the subject matter of the new action side of the line rather than being part of the conduct in or immediately preceding the new action or application. It follows that the exercise by the Judge of the costs discretion miscarried.
49 Justice Blue had also, relevantly, held that the "conduct of a party prior to the litigation commencing, and which is a direct cause of it" is not ordinarily one of the "circumstances warranting an indemnity costs order": at [404], citing the authorities outlined above.
50 Subsequently, the Full Court's decision in Clone SASFC was overturned on appeal by a unanimous High Court in Clone HCA. By that decision, the High Court held that "the general power of a court to set aside its perfected judgments requires actual fraud": at [2]. The High Court rejected the proposition that any lesser allegation could provide a basis on which to set aside a judgment: Clone HCA at [55]-[62]. In other words, the power to set aside a judgment obtained by fraud was not to be "diluted to allow, for instance, the judgment to be set aside for misconduct, accident, surprise or mistake": Clone HCA at [55].
51 I do not consider that the decision in Clone SASFC necessitates any different outcome in this case. The Full Court in Clone SASFC did not decide the question before this Court of whether, exceptionally, indemnity costs can be awarded in circumstances where a judgment is set aside on the basis of fraud. It was concerned with an application to set aside an earlier judgment on lesser grounds of malpractice or misconduct, being causes of action which the High Court held on appeal were misconceived.
52 Further, an action to set aside a judgment procured by fraud is of an entirely different nature and quality from a judgment affected by malpractice and misconduct, and vindicates public interest considerations of the highest order, as I have explained. It is necessary in an action to set aside a judgment for fraud to establish "actual fraud … the person chargeable with it … acting in order to take an undue advantage of some other person for the purpose of actually and knowingly defrauding him": Clone HCA at [55], citing Patch v Ward (1867) LR 3 Ch App 203 at 207 (Lord Cairns) (emphasis added). Mere mistakes, accidents or misconduct are not sufficient; only "positive and actual fraud" in the sense of "a mediated and intentional contrivance to keep the parties and the Court in ignorance of the real facts" will suffice to set aside the earlier judgment: ibid, citing Patch at 212-213 (Lord Cairns); see generally the Rawson Primary Judgment at [57]-[78], especially [63]-[64].
53 In those circumstances, and in the context of awarding indemnity costs, I do not consider there to be any relevant analogy between judgments obtained through fraud, and judgments obtained through malpractice. Rather, as I have explained above, the relevant analogy lies with contempt of court. As with fraud, contempt of court hinges upon the intentionality of the relevant misconduct: Principal Registrar, Supreme Court of New South Wales v Katelaris [2001] NSWSC 506 at [23] (McLellan J). Likewise, as with the Court's power to set aside fraud, the underlying rationale of every exercise of the contempt of court power is the necessity to "uphold and protect the effective administration of justice": Australasian Meat Industry Employees Union v Mudginberri Station Pty Ltd [1986] HCA 46; (1986) 161 CLR 98 at 107 (Gibbs CJ, Mason, Wilson and Deane JJ).
54 For those reasons, I consider that indemnity costs should be awarded for the entirety of the proceedings (save for the costs application). The remainder of these reasons address the Commissioner's alternative ground in the event that I am wrong in upholding the Commissioner's first ground.